Much has been written about the psychology of trading and, in particular, the theory of trading psychology. In this article we will focus on some of the issues that may arise and some specific exercises will be shown on how you can fight these issues and how they can be eliminated.
What is most important to acknowledge is that emotions associated with trading emerge from something. Emotions don’t arise from the air, emotions arise from the thoughts we put in our mind and from biological reactions triggered by these thoughts. What does it mean in practice: If we think about the fact that our trades do not come out as a success, we start to worry, so we put a negative thought and a negative emotion of fear appears. But this is not the beginning of the problem. Negative thoughts also appear from something. In this case, negative thoughts result from poor previous experiences or low self-esteem. If we had enough confidence, our thoughts wouldn’t turn to previous bad experiences thinking that we failed before. In a perfect scenario, we would take it as a lesson and transform the negative emotions into a productive thought that would help us improve in a future. Likewise, if we feel demotivated, the cause may be a lack of inspiration that stems from poorly set goals.
Another problem may be a lack of discipline. But if we compare it to my favourite resemblance with house building, the discipline is like the stairs from the basement to the first floor, while emotion management is building the floor so we have where to put the stairs.
For those of you who do not know what it means, imagine trading as a house building. The first step is to select the land that in this case represents trading in general. Then we choose the type of construction, which means we decide what we want to trade. Then comes the design itself from the architect, a plan to start building and selection of a construction company that in this case is the strategy we choose based on our knowledge. Then we can build the foundations, which is one of the most important, yet often neglected trading psychology or we could say how we manage ourselves, our emotions, how we follow our chosen strategy and discipline needed in order to execute our strategy. Only then on these strong foundations based on clearly chosen strategy and mastering of the psychology we can build another floor that represents profits. Those can increase unlimitedly with each floor.
Here I have the first task for you: Write down why you began with trading in the first place and what you enjoy about it. Every time you aren’t sure if your time is dedicated in the right direction, go back to this list and remind yourself why you do what you do. Write to me to email@example.com the reasons why you enjoy trading, I will be happy to read it and be inspired by it.
If we look at emotions and their coping, I’d like to introduce to you the method called DOT (doing – outcome – thinking) that was introduced by an American psychologist. Its essence lies in considering all the available facts first and based on the rules we set, we then simply act. Then something will happen, an outcome, in our case a profitable or an unprofitable trade and only after that there comes the moment where we can give space to emotions. Here, I would like to mention that you need to think of trades as profitable or unprofitable, not as successful or unsuccessful. Even a losing trade can be successful. If you have managed to follow your strategy and your rules, you have not been dominated by emotions and have taken the trade as a lesson, then this loss-making trade is only a statistical item, a cost to trading just like any other activity. Every time you decide which trade to take, evaluate all the facts you have available and then decide into which trade to enter. Tell yourself what a computer would do in your place because a computer doesn’t have emotions and makes decisions based only on the data set in the program. Enter the trade and follow the limits you set. Only after that give space to your emotions, and in case of a loss, rationally evaluate why it happened, how to prevent it next time or praise yourself in case the trade turned out profitable. Take your time to absorb the emotions, for example, set your phone for 2 minutes and let yourself be fully dominated by emotions. Consciously imagine letting off emotions when the alarm goes away. Do not think about past trades and do not enter another trade unless you have a clear head.
Exercise: Test this methodology every day. Write down how you are doing and always review everything. Write yourself a feedback as if you were writing it to someone else. Think about the reasons why you didn’t succeed. I will be glad if you write to me (firstname.lastname@example.org) how successful you are, or the reasons why you are not.
In other articles, we will look at motivation, how to set goals correctly, how to strengthen self-confidence or how to build better discipline.